The first question people have when they want to get control of their money is:
Where do I start?
A written spending plan is the most important thing you can have in your life. John Maxwell says
Follow these simple steps that will get you started budgeting and taking control of your money.
1. Go high tech
An Excel spreadsheet or paper budget is more time consuming and you will be more likely to abandon the process. Using software – especially one that has a smartphone app – makes budgeting a breeze.
These are my top 3 recommendations. Choose the one that works best for you.
- Mint (free, used by millions, automatic transaction importing)
- EveryDollar (free for basic version, $99/year for automatic transaction importing)
- You Need A Budget ($60 one-time, no automatic transaction importing)
2. Save your receipts and statements
To create a spending plan, you have to know what you’re spending money on. You can find out by saving all of your receipts, bank statements, and credit card statements for at least a month.
Ideally you would have three months of data, but one is enough to get started.
If you never spend cash this is pretty easy – use your past credit card statements.
You must account for every dollar spent.
- If you’re spending cash, keep notes in your smartphone
- Keep copies of checks
- Write on the back of receipts what you bought
- Write it down on paper if you have to
The more accurate your information, the more likely your spending plan will work.
You don’t need to track everything
Some software lets you track investments, 401(k)s, 529 plans, insurance, etc.
There are only a few important accounts you need to track:
- Credit cards
- Savings (if used for expenses)
Don’t get caught up in tracking every piece of information. This is a spending plan for month-to-month stuff. Not your retirement planning.
3. Organize it how you want to
When you’ve got all your receipts in a pile break them into smaller piles that make sense to you. You might consider categories and subcategories like:
- Home – electricity, gas, cable, Internet, insurance, upkeep, property tax
- Health & Fitness – dentist, pharmacy, doctor, insurance, disability insurance, gym
- Food/entertainment – groceries, eating out, events
- Transportation – car payment, gas, service, insurance
- Life – pet car, personal shopping, travel, kids
Name and group your categories that make sense to you. If you use software they have default categories and subcategories – rename them to what seems natural.
I don’t have a ‘haircut’ category or a ‘magazines and books’ category. They don’t make sense or work for me.
4. Add up the categories
Once you have your information organized in a way that makes sense to you, add up the expenses for that category. The sum becomes your starting point for your budget.
If you have one month of data, use that sum.
If you have three months of data, divide it by three to get the average monthly amount.
For example, if you have three months of electricity bills totaling $100, $125, and $150, the average for one month would be $125. $125 would be used as your budgeted amount for electricity each month.
Include a category for Miscellaneous and set aside some funds for it. There are always miscellaneous expenses each month like postage stamps or Girl Scout Cookies.
5. Spend your income on paper first
Before the month begins use your budgeting software of choice (or paper if you prefer) to input all of your expected income and expenses.
Every dollar you receive as income should be assigned to a budget category (expense, savings, or debt payment).
When you assign every dollar, you will end up with a zero-based budget.
6. Look for ways to cut your spending
Most people are living paycheck-to-paycheck. When you track your spending, you can find areas that you can cut back on easily without sacrificing your sanity.
The key is to be realistic when cutting back. If you spend $500 a month on eating out, cutting back to zero will make you more upset than overspending.
You still need to have a life when you’re on a budget and have fun. The spending plan will help show you how to do that.
- Can you cut cable?
- Are you spending too much on car insurance?
- Can you eat out a few times a month less?
- Can you spend less on clothes?
- Can you buy store brands at the grocery store or buy in bulk?
Look at everything you spend money on and ask yourself:
Is there a way I/we can save money on this?
Is this a want or a need?
If you have debt to pay off apply any extra towards the debt. To pay off your debts faster read how to get out of debt quickly in 4 simple steps
Don’t go crazy
When you try to completely overhaul your finances, it’s like trying to cut your favorite food out of a diet. It’s a recipe for failure, and you won’t stick with it.
Make a few small changes you know you’ll be able to stick to. Those changes will become a habit. Over time, you will continue to improve your spending month after month.
If you’re deep in debt, you should cut back more until you’re out of debt.
If your financial situation is a little better:
Who cares if you buy a $5 Starbucks once in a while if it makes you happy?
Cut back on the stuff that isn’t important to you, so you have more money for what is.
7. Commit to trying it for 90 days
Track your spending for the next 90 days. Ninety days will help you build the habit of recording your spending and giving a clear picture where your money is going.
When you get started with a spending plan, it’s best to spend 30 minutes a week keeping it updated. When controlled spending becomes second nature (and it will), you can cut back to every couple weeks.
Take this time to review the budget with your partner if you’re married.
8. Update and tweak
At the end of the month, it’s time to create your budget for next month. Start by asking:
- How did I do last month?
- What categories was I over/under?
- Are there places where I need to cut back?
For the first few months, it’s normal to be off. You shouldn’t get frustrated because you’re still in the learning and tracking process. Plus you have variable expenses like the price of gas that will be up and down month to month.
If you have extra money leftover, consider applying it to debts, savings, or investing. The occasional reward will keep you motivated too.
Revise your spending amounts as needed. After several months budgeting becomes second nature. You’ll spend less time doing it, you’re spending habits will change, and you’ll be on the road to financial freedom.
The most important step is to get started today. There is no better day to get started. Yesterday is gone. Tomorrow is going to become someday. Action equals results.
These steps will help you start the budgeting process in the simplest and quickest way. When you keep it simple, you’ll more likely follow the plan and stick with it.